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Sunday, March 19, 2017

Do These 3 Things When The Fed Raises Interest Rates

This past Wednesday, the Federal Reserve raised its target for federal funds by a quarter percentage point, from 0.75% to 1%.  This means banks will be charged a tad bit more for borrowing money from Federal Reserve banks.  Most people don't understand what any of this means.  The Federal Reserve is actually a network of 12 banks and 24 branches across the country.  Part of their job is to loan inventory (cash) to other banks at the going "Fed Funds" rate.

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The Federal Reserve has kept the funds rate very low the past several years, to spur the economy via cheap money for banks that they can turn around and lend to companies and people at higher (but still low) rates.  With inflation creeping up, however, the Fed has begun hiking the Fed funds rate to keep the money supply from being too high which would cause even more inflation.  The days of cheap money for borrowers are ending.  Good or bad?

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In this post we'll explore what you should be doing with your money right now to adjust to the new Fed policy.  (By the way, the Fed has signaled two more rate hikes in 2017).  Not doing these things will seriously cost you some bills in the near future.

1. Be aggressive paying off your credit card debt.  In my last post, I mentioned that 157 million have outstanding credit card debt.  Credit card interest rates are variable.  (They're actually tied to the "prime rate," an index a few percentage points above the federal funds rate).  So your equity line of credit and credit card debt will be facing higher charges.  The change is immediate too.  Your interest rates are on the move up now!  Do not play around with your balances, meaning paying just the minimum or a few bucks above the minimum.  Be aggressive with that debt and pay it down as much as possible.  Divert money you may be saving for other things to paying down your credit debt.

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2.  Borrow cheap money before it gets more expensive to borrow.  If you're a business owner or are looking to start a business, now is the time to go get a loan.  You're going to want to borrow before the next two hikes, or you'll pay more for it.  The same goes for people that want to buy a house.  Although interest rates on home loans are not tied to the federal funds rate, they'll be creeping up nonetheless because banks are being charged more for borrowing, meaning they'll pass on these extra costs to the consumer.  If you have been waiting to refinance, now is the time to get on it for similar reasons.

3.  Transfer money from your regular savings account into a Money Market Account.  MMA's are not FDIC insured as is your regular savings account, but they are relatively safe.  The Fed raising rates is a move that benefits savers.  Remember, the Fed kept rates at 0% for many years to get people to invest.  This punished many savers who couldn't get squat for putting their money in long term CD's.  Now the reverse is happening.  Little by little, you'll see interest rates being offered for CDs start to increase.  This means that if CDs are your thing, start laddering as you don't want to tie your money up when rates are rising.  Again, keeping money in a savings account when rates are rising is plain stupid.  The most risk averse people should move some of their savings into a MMA to capture more upside.

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One last tip, mind the rate of inflation.  If the Fed is raising rates, it means inflation could be a real threat to your purchasing power.  Inflation has been so out of the news for so long that people have been lulled to sleep.  If you're not making money on your money (by investing) at a rate above inflation, you're essentially losing money as you'll not be able to buy as much.  The economy is improving.  This isn't just an expression for you to repeat over the water cooler at work.  Take action!  Until next time.  If you liked this post, please consider subscribing to get more like them in your inbox.      
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Sunday, March 12, 2017

6 Ways To Resist The Use of Your Credit Card

Credit cards.  They're everything to some people.  According to the Nilson Report, credit card receivables topped $1 trillion in 2016.  Out of this total, 65% of it or $650 billion, was subject to a finance charge.  Yikes!  How many people in America would have to have debt outstanding on one or more credit cards to tally $650 billion?  Around 157 million.  Meaning, if you're reading this, you probably have a credit card balance.

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When saving (and not making more) money is the only way most Americans have any chance at building wealth, why would they so readily shoot themselves in the foot, so to speak, using credit cards irresponsibly?  What doesn't pop into most people's minds when going for that credit card in the wallet is what ultimately kills any chance at living a life financially secure.  To call you naive would be correct, but insulting.  To call you out on your ignorance would be harsh, but perhaps what you need to hear.  You see, the use of a credit card is an emotional thing, and I just pushed your buttons so you'd start to really think about your obsession with plastic.

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With that, let me say that I'm here to give you some tips on how to reduce your use of credit.  You shouldn't stop using your credit card altogether.  There are times when using a credit card makes more sense.

1) Stop shopping so much!  Does shopping make you excited?  Do you feel depressed when you're not at the store, mall, or online at an e-commerce site, and a rush when you are?  See a psychologist!

2) Screw convenience!  Many people pay with credit card because it's more "convenient" to do this versus carry and count cash at the register.  Not seeing the money leave your hand, however, is exactly why you're in your debt predicament.  When you use plastic, you're seeing past the cost of the item(s) and only acknowledging the benefits.  Use cash more often and you'll spend less often, guaranteed.

3) Don't fall for the gimmicks.  Spending for points and prizes makes you a sucker.  There are people who use their credit cards as part of rewards program, turning shopping into a game.  I recently read an article on CheatSheet.com with headline: How I made over $2,000 from only using credit cards.  Articles like this are very misleading, and only feed into people's competitive nature.  The perks are intentionally juicy people!  Don't fall for it.

4) Use your ATM-Debit card.  This is what I do.  My Wells Fargo ATM debit card handles about 99.9% of all my monthly purchases.  This card is linked to my checking account so it's essentially like using cash.  I don't believe in kicking the can down the road.  I can track exactly how much I spend, and pay the full amount with no worries of ever having a potential finance charge.  Plus it's just as convenient as a credit card.

5) Don't conform.  You don't have to be like everyone else, you know.  If everyone else is using their credit cards to make themselves feel wealthier than they actually are, you don't have to follow suit.  If you associate with people wealthier than you, trying to keep up with them will be the end of you.  Don't be part of the herd!

6) Accept life's negatives.  Pushing aside life's negatives to live in a make believe world will only make the negatives pile up.  It's best to confront your financial situation, and take it head on, sacrificing if necessary.  The credit card is not your magic wand that you can flick whenever you want a fairytale experience.  If you do use it splurge on yourself, your fairytale will have a bad ending.

Don't justify the overuse of your credit card to build credit or win rewards.  Having a track record of making credit card payments on time and paying over the minimum monthly payment is nothing to brag about.  In fact, paying any credit card interest is foolish.  Avoid doing this like you'd avoid a sick co-worker.  Thanks for reading!  If you liked this post and want to receive more like them in your inbox, please subscribe.
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Wednesday, March 8, 2017

Get Your Kids Saving for College or Retirement Now!

Do you like going to work each day, exchanging your time on earth for money?  Hmm...I think the majority of you would say, heck no!  Well, our kids (I have two) will also hate having to join the rat race and be financially insecure, especially when it comes to retirement.  I don't think we have enough adult conversations with our children about money.  Many of you would rather keep children oblivious to the hardships of making ends meet in America.

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I say that's wrong.  We don't give our kids enough credit.  They are capable of taking on more responsibility for their own future than most of us imagine.  There are two major expenses that will overwhelm them just like they overwhelmed us, college and retirement.  Many adults see paying for their kid's college as their responsibility.  But let's face it, unless you're a high roller, you'll be making some serious sacrifice, most notably toward your own retirement savings, by paying for your kid's college education.

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Financial lesson number one all kids should learn: saving.  They will be given money as early as three years old.  Either you or a relative will gift them a little cash.  Having them build a habit of saving any money they come into, will be the best thing you can do for them.  Once they're four or five, depending on maturity, you can start talking to them about college.  That's what any great parent would do.  But don't just stress the importance of going to college.  Also talk to them about the costs.  Then invite them to save some of their allowance or birthday money for this expense.  Write on their piggy bank, "College Fund: Do Not Spend Ever," even if they have yet to learn to read.  You can tell them what it says.

When they're in elementary, and have learned some basic math, you can have them do a simple math project.  How much money would you have at the end of 12th grade if you saved $1 a day?  If they're in 2nd grade and start saving that year, they'll have 11 years to put their money into a savings account (one that you'll set up for them...preferably a Money Market Account in your name, or a Roth IRA where you'll be the custodian).  Have them calculate how much money they'd have after a year.  That's 365 times 1 or $365.  After two years, $365 plus $365 or $730.  Don't talk to them about interest until they'rein 4th or 5th grade.  Make a simple chart for them.  See below:

Year      Grade        Money Saved
1               2                 $365
2               3                 $730
3               4                 $1,095

Seeing the money add up would motivate most kids to take on the challenge.  The next part of the project is for them to brainstorm where they'll get this $1 from.  Ideas?  Well, there's allowance, doing chores for money, and even selling things (like cool stickers) to other kids.  Get these in bulk from Amazon and sell individually.  By the way, school is where many candy and toy transactions take place unbeknownst to the administration.  Yes, many entrepreneurs began their journeys as young hustlers on a school campus.

By middle school, many teens know if they love to learn, study, and read.  These are prerequisites for being successful in high school and college.  If your child has kept up his/her savings program for college, encourage them to ramp it up.  Instead of a $1, have them save double, or $2.  The key is dangling the balance in front of their face.  You should be showing them how much money they have in the account periodically.  This will keep them money primed.

The beauty of getting kids focused on saving money for college or retirement (more on the latter in a bit), is that kids will understand the nature of the game so to speak.  Freedom costs money.  If you don't put in the work early (saving), you'll be put to work for many years.  If it turns out that your child decides to forego on college, then in effect, their college savings account has become a retirement account.  If they've not touched any of the money thus far, which would be a great feat since young people have a hard time with delayed gratification, they can lock it up even more by transferring the money into a Roth IRA of their own.

Kids should now why saving is important and the words that should spring forth from their mouths whenever asked is, "college and retirement."  Make these two words so well known in your household so that there is never any doubt why you go to work (to save for retirement as much as to pay for your expenses) every week.  Let your kids be kids but don't set them up for enslavement to debt either.  They should know!

Until next time.  Thanks for reading.  If you liked this post and want more like them, please subscribe.    
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Wednesday, March 1, 2017

Don't Be An Idiot Refinancing Your Home

Refinancing your home seems like a no-brainer when interest rates are lower than your current adjustable or fixed rate loan.  Or is it?  Most people, when asked to comment on the benefits of refinancing their mortgage, will tell you that it allowed them to take cash out (from their equity) and pay down other debt or do a major home improvement.  They justify getting a new mortgage on their home by explaining that they were able to lower their monthly payment on account of refinancing into a lower interest rate.

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There are times when refinancing your home makes financial sense.  If your home has appraised enough, e.g., you owe $250K and the appraised value of your home is $375K with interest rates lower than your current fixed rate, getting a new mortgage at $375K and getting over $100K in cash out for the purpose of buying rental properties, I say go for it!  I would not use that money to remodel my home because no project will ever get you a dollar for dollar value.  You'll be using $100K to maybe add $85K in value to your home.  Rental properties allow you to get assets that'll pay you monthly income (if you buy right) and your return on that $100K will be worth much more over time.

Another great reason to refinance is your mortgage converting to an adjustable or variable rate in the immediate future.  Rates are rising so you can pretty much guarantee an increasing monthly payment.  In this case, by all means, refinance!  Paying off high interest credit cards or other debt with the cash you take out from your home is also a smart move, but you shouldn't have gone there in the first place.  What a waste.  

Now let's look at how idiotic it can be to refinance your home.  As you may already know, most of your payment when just starting out on your mortgage goes to interest.  Very little of your payment actually goes to paying the principal.  You can look at an amortization schedule of your loan and see for yourself.  So when you refinance like to like, meaning if you had a 30-year fixed rate loan and you refinance into another one, even with a lower interest rate, you've essentially reset the clock.  Continuously refinancing puts you right back in the interest-paying portion of your new loan.  Let's also not forget that refinancing costs money up front!

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If you plan on living in your current home for most of your life, why would you want to return to the interest-paying portion of a new loan?  But mortgage interest is deductible, you may be thinking.  Did you read my last post on how there's very little tax savings in mortgage interest on your home?  You should read it so you can realize how badly the bank is going to screw you collecting all that interest when you make the minimum monthly payment on a 30-year fixed rate loan.

So what should you do when considering refinancing?  Refinance to a 15-year loan instead of a 30-year one.  Your monthly payment will be higher with a 15-year loan, but at least you'll pay a whole lot less interest over time.  Yet another obvious solution is to make larger mortgage payments if you've already refinanced back into a new 30-year fixed rate loan.  Making 13 payments a year works wonders to reduce your interest costs.

Okay, so don't think refinancing to a lower rate on your mortgage is penalty free.  You'll owe more on your home AND be back at the mostly interest-paying portion (first 15 years) of your amortization schedule.  Not good.  Refinance into a 15-year loan to avoid being an idiot.  Thanks for reading!  If you found this post to be informative and want to get more like them, please consider subscribing below.  Also hit some likes on some of my social media buttons on this page.   
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Sunday, February 26, 2017

Paid Lots of Mortgage Interest This Year? Too Bad.

Tax season is upon us.  Last week, I sat with my Enrolled Agent at her office (I was there to submit all of my pertinent documentation for her to prepare our tax return) and had an interesting conversation about mortgage interest.  She described how unfortunate it is (for tax purposes) to have lots of mortgage interest to report for your tax return.  It basically means you paid a lot of money to the bank for little in return.  Let me explain.

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Many people new to being a homeowner have this misconception about mortgage interest.  They believe all of it is deductible.  They were sold on being able to deduct mortgage interest from their taxes as one of the benefits of owning a home.  And while that isn't a lie per se, it isn't the entire truth either.

First of all, not every home owner is eligible for a tax break from their mortgage interest.  If you don't itemize, you can forget about reporting your mortgage interest.  Why wouldn't people want to itemize if they own a home?  Well, the math may not make sense to do so.  Your tax preparer (that may be you) should know if you have enough deductions that add up past the standard deduction you could otherwise take as part of your filing status.  For example, for married couples who file a joint return, the standard deduction is $11,600.  If all you have is a home with no other personal businesses, your deductions may not add up to this amount.  Therefore, you don't get to itemize.  All that mortgage interest you paid...useless and costly.

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Now to address the other bad news.  Say you do have enough deductions, well, do you honestly think the IRS would want to give you a dollar-for-dollar break on your personal home mortgage interest?  Think about it, you live in that home, why should all of your mortgage interest be deductible?  When you go on a trip as a business owner, you only get to deduct 50% of your food expenses.  You have to eat anyway!  The IRS is a slick machine, logically taking as much of their cut as possible.  So in the case of your mortgage interest, the tax deduction you qualify for is dependent on your tax bracket.

Here's an example.  Say you're in the 35% tax bracket, and you have reported $12000 in mortgage interest.  Well, you only get to exclude $4,200 (35%) from taxation.  That's pennies on the dollar if you're paying attention.  Pretty sad, huh?  Can you imagine those poor bastards who buy up huge properties and are at the beginning of their amortization schedule, paying almost everything to interest.  This is a sucker's game!  In the case above, you may be better off taking the standard deduction, again, depending on your tax filing status.  Look it up!

If you're in a lower tax bracket, your benefit is even less.  For the same amount of mortgage interest from above ($12000), a filer in the 25% tax bracket would only get to exclude $3K from taxation.  Boo!  What does all of this mean?  Well, if you're considering buying a home, you may be better off renting, especially if all you'll have to itemize is your mortgage interest.  If you're a professional working for the Man, owning sounds great, but you better have a lot of other assets.  Like me!

I have three rental homes, and an Internet business along with my day job.  I itemize yearly.  So although I too am paying a butt load of mortgage interest to the bank on my personal residence, at least I get a dollar for dollar deduction on rental income versus my expenses as a landlord.  Moral of the story...buy assets.

If you can afford it, get into a 15-year loan so you pay far less interest to the bank for the life of the loan.  Or better yet, pay your home outright from the start.  If you're not a shrewd and successful investor, putting your spare cash to pay off the mortgage sooner may be the best course of action for you.  Thanks for reading!  If you liked this informative post and want to get more like them, please subscribe below:

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Tuesday, February 21, 2017

Why You're Not Saving Money Even With A Budget

I tried finding the latest figures on the percentage of households that prepare a detailed budget and could only find Gallup's 2013 Poll.  Gallup reported back then that 1 in 3 families actually take the time to write or type up (on computer) a detailed budget.  There are also a large percentage of people that report to keeping their budget in their head (yeah...like this works), and some who scribble some things down on paper, but never get around to finishing.  Let's focus on the households that take budgeting seriously.  How, I ask you, is it possible that even with a detailed budget, most people aren't saving money at the end of each month?
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Today's post is all about the common mistakes people make budgeting.  Sometimes the problem is in the plan:

1.  Unrealistic budget.  Your budget should reflect your lifestyle.  Too many people set crazy parameters that they have no way of maintaining.  Say you've spent about $500 on groceries the past three months. Is it reasonable to budget $300 for groceries all of a sudden?  Not unless you're willing to starve yourself.  $450-$475 is a better goal.  Be mindful of changes to your situation as well.  A budget needs to be pliable.

2.  Complex budget.  Last month I wrote a post on why you should only use three categories for your expenses.  It simplifies budgeting and makes where you can save completely obvious.  This post was so popular it was published at Beatingbroke.com  and apparently brought Shane (the blog's owner) "more traffic in one day that I usually see in an entire month!"  The post was also picked up by RockstarFinance.com and Lifehacker.com.  So should you read it?  Of course!
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Sometimes the problem is not in the plan, but the execution.

1.  Not reviewing the budget weekly.  Yes, you should review your budget every week.  That's four times a month where you are plugging into your head as a result of seeing things more than once, numbers you should not be surpassing.  If you set it, you'll forget it.  If you return to the budget to finalize your expenses at the end of the month, you'll see that you may have gone over multiple limits in various categories.  All because you didn't have a working memory of your limitations on each category.  So review, review, review!

2.  Not updating the budget weekly.  You must set time each Saturday or Sunday to update what you've encumbered already.  This means logging onto your bank account and going through each expense.  Obviously you need to note on your budget how much you got left to spend on things after each week.  If you have a grocery budget of $600 for the month, e.g., this means $150 per week to not go over.  How do you respond if you're at $175 at the start of week 2?  You're $25 over!  So cut back $25 on week 2 to stay on target.

3.  Not adjusting the budget when things happen.  Okay, so you have a set budget but you get a flat tire that cannot be repaired; now you need a new $85 tire.  If you didn't plan for incidentals in your budget, you'll need to adjust your budget to absorb this unexpected expense.  Most people spend the $85, say, "oh well," and go over their budget for the month. What should you do?  Eliminate $85 worth of expenses starting with the easiest place you can trim, like eating out.  Sorry, eat at home twice more (two less night outs), and this should cover the cost of the tire.

There you have it.  There is absolutely no point to doing a thorough budget if the plan is faulty or if your execution is poor.  Budgeting gets abandoned because most people don't have the discipline, conviction, or patience to adhere to parameters in their lives.  It's a whole lot easier to be in debt, then to get out of debt.  Lifestyle habits are hard to change so I suggest you budget wisely and above all keep it simple.  Thanks for reading!  If you liked this post and want to get more like them in your inbox, please subscribe to this blog by entering your email below.
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Thursday, February 16, 2017

5 Natural Ways to Teach Your Child About Money

Play is the most natural state a child can be in.  Teaching them anything before 1st grade forcefully or unnaturally will be like herding cats.  Now, I'm not an elementary teacher, but I've taught middle school long enough to know toys are great for introducing concepts and sparking interest in the minds of students.  When I bring out toys for props in my science class, my students' eyes light up.  Many of them (mostly the boys) still like playing with toys despite not wanting to look immature.

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In raising my two children, Rehani (5) and Ajani (3.5), I've used their natural curiosity and love of toys to teach them about money.  As they age, I'll be more obvious and direct in my communication and approach.  If you want to ensure your kids are exposed to money concepts as early as possible, it's best to plant items around the house that they can grab, touch, and perceive as something for grown-ups; an experience with the "forbidden" makes it that much more fun for them.

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So here's what I've done:

1) I've left spare change around the house.  Note, you want to make sure your child is at an age where they're no longer putting toys or foreign objects in their mouth.  While Rehani and Ajani are playing with the coins, I'll join them and ask them to tell me what they're doing.  After saying something like, "We're playing with money," they'll get to asking me what each coin is.  Start with three coins, like pennies, nickels, and dimes.  Have them contrast the colors and sizes.  Have them make careful observations of each coin.  In due time, they'll be able to identify each coin correctly.

2)  I've left my two-gallon plastic spare change container on the floor, and have dropped spare change into it in the presence of my kids.  Yeah, there's been a few times where they've emptied it out on the floor, and I've had to supervise their putting all of the change back inside, but from this the kids have requested their own piggy banks.  They want what daddy has!  Now I had to explain to them why I put my spare change in the container (saving) and this has taught them the importance of putting money away to buy or pay for things in the future.

3)  I've paid my bills at the kitchen table while the kids ate.  They see me writing checks out, and want to do the same.  I've ripped out a few blank checks and have let them go to town doodling on theirs with pens.  I've, of course, explained to them what checks are for, and why daddy must pay his bills.  Whatever you do, don't complain while paying bills near your kids.  They may associate reading (from your statements) as a frustrating and painful act.

4.  I've bought them a toy cash register with accompanying paper money and credit card.  The card can be swiped to cause a "sale" button to pop up.  We go on make believe shopping trips and they fake buy toys they already own.  I act as the cashier and take their money as well as give them their change (plastic coins).  Sometimes I tell them they don't have enough money to make a purchase.  I suggest to them that they put certain things back so they can complete their transaction.  The lesson here: You can't just buy all of the merchandise; you have to be selective and buy things you can afford.

5.  My wife Jessica has "hired" the kids to help her clean around the house.  (I've had the kids help me clean too, but have not paid them for their services).  The kids will want to be around us when we're hard at work completing chores.  We tell them to leave and go play, but they just won't.  So this is when we put them to work with us.  We give them little tasks like wiping the table or countertops.  I have them help me take the recyclables to the bin outside, do laundry, and put folded clothes back.  By paying them a quarter to do these spontaneous tasks, they learn to work for money.  When they get older, we'll give them specific chores to do regularly for an allowance.

Having your kids experience money at an early age is important.  Talk to them as much as possible about money, and don't be afraid to tell them why they can't get a certain toy or why they can't have pizza everyday (too expensive, not in the budget, etc.).  Even if they don't fully understand each concept, you'll have at least introduced them to the vocabulary of money.  The more words they know the better they'll be when starting elementary!  Thanks for reading.  If you liked this post and want to get more like them in your mailbox, please subscribe before you leave.
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